Andrew Davidson adds home price appreciation to its model

Andrew Davidson & Co. will be adding home price appreciation data to its Vectors prepayment models for conventional, government and jumbo fixed-rate mortgages.

This is the first time that this kind of data will be incorporated in commercially available pool-level prepayment models. The company will also apply this type of data to its loan-level models.

Home appreciation data is important for explaining fluctuations in prepayment speeds affecting mid-range coupons (neither deep discounts or high premium securities) through different time periods. The reason why this type of fluctuation happens is a crucial question that has not been answered beforehand in pool-level models, though loan-level models have done so in the past.

"It's not good to have a phenomenon that you haven't explained," said Eknath Belbase, a senior analyst at the company. "The home price index provides a good explanation for the variation in prepayment speeds for mid-range mortgage-coupons."

This data is also useful in differentiating between similar loans in different areas of the country.

Aside from helping market participants understand the relationship between home price appreciation and the acceleration of prepayment speeds at different time periods, Andrew Davidson will also update its models to reflect current prepayment data, including data on the number of cash-out refinancings.

The home appreciation data will be provided by Mortgage Risk Assessment Corp. Andrew Davidson will reveal details of this home price appreciation feature on June 14 in its annual client conference to be held in New York.

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